“Central Bank has moved fast”

(January 04, Colombo, Sri Lanka Guardian) The recent Ceylinco Group crisis is brewing a liquidity issue in the country, according to some industry analysts but bankers and other experts say that things will settle soon.

Some bankers said that the deposits that are withdrawn from one financial institution will move into another financial institution and hence the liquidity of the system will be unaffected. “Liquidity in the system will be affected if people lose confidence in the whole financial system and tend to keep their savings at home rather than deposit in a financial institution, in which case the Central Bank will have to intervene,” a banker said.

R. Gajendran, Partner Gajma and Company, said a fear psychosis is creating the impression that there is a flight of funds from some companies.

“The Central Bank has moved fast on this occasion and it is endeavouring to bring about stability. In any environment, if people start withdrawing money just like that, there could be a run even on a large, established and stable bank. With the intervention of Central Bank and with the restoration of confidence, hopefully things should settle down.”

He said the current Ceylinco crisis is a crisis of confidence. “The world over confidence of the people in the financial system has been challenged as never before. Financial mismanagement over enthusiasm and greed in the western market have brought about the present crisis. Sri Lanka is gradually starting to feel the pinch and it may proliferate in magnitude during 2009. The second quarter of 2009 may redefine Sri Lanka’s destiny,” he said.

A senior banker said that no bank can survive without the trust of their deposit holders and hence a loss of confidence by the public in a large bank is an issue for the overall financial sector.

“With the Central Bank’s intervention we believe the initial panic will be short lived and things would settle down soon.

However, there would be other challenges for the industry next year like the slowdown in loan growth, rising NPLs, limited capital funding sources and lack of liquidity in the foreign exchange market,” he added. - Sri Lanka Guardian